I INSOLVENCY LAW, POLICY AND PROCEDURE
i Statutory framework and substantive law
Insolvency proceedings in Sweden are mainly governed by the Swedish Bankruptcy Act (1987:672) and the Swedish Business Reorganisation Act (1996:764). Bankruptcy proceedings are aimed at the winding down of insolvent companies by way of liquidation of assets belonging to the bankruptcy estate followed by distribution to the bankruptcy creditors. Reorganisations, on the other hand, are aimed at achieving successful financial restructurings of companies that are deemed to have sustainable long-term business prospects.
There are, in addition to the Bankruptcy Act and the Business Reorganisation Act, a number of other laws that are relevant in Swedish insolvency proceedings. Perhaps the most important ancillary law is the Swedish Priority Rights Act (1970:979) as further described in Section I.viii, infra. Also of great importance is the Swedish Companies Act (2005:551) that, among other things, contains personal liability for directors and managers that continue to trade with a limited company that has impaired more than half of its registered share capital. Another law of great practical importance is the Swedish Wage Guarantee Act (1992:497). Further, the Swedish Penal Code is relevant as it contains certain criminal offences for directors and managers of insolvent companies.
Sweden is a creditor-friendly jurisdiction, which is evidenced, inter alia, by a generous regime for offsetting claims against bankruptcy estates and an extensive clawback regime in respect of transactions that have been detrimental to an insolvent debtor. Historically, almost all formal insolvency proceedings have been bankruptcy proceedings. However, there seems to be political consensus that it would be preferable for the Swedish economy as a whole if more companies could be successfully restructured through formal insolvency proceedings. However, during the past couple of years it has been recognised that the Swedish Business Reorganisation Act has in many ways failed to provide effective means for restructuring financially distressed companies. The formal restructuring regime is perceived to be overly time-consuming and costly, which makes it unsuitable for smaller and medium-sized companies. Further, formal restructurings are often unsuccessful, which gives rise to further losses in the bankruptcy proceedings that usually follow an unsuccessful restructuring. In light of the above, the Swedish government has published an official report on the possible reform of the legal framework for formal insolvency proceedings. However, it still remains to be seen if there will be any changes to Swedish insolvency legislation.
iii Insolvency procedures
As mentioned in Section I.ii, supra, bankruptcy and business reorganisation are the two formal insolvency proceedings that are available under Swedish law. Ancillary (non-main) insolvency proceedings are also allowed in Sweden according to the regime set out in the Insolvency Regulation (EC) 1346/2000 (the Insolvency Regulation). It should also be noted that there is a Nordic Bankruptcy Convention that has been entered into between the Nordic countries Denmark, Finland, Iceland, Norway and Sweden. The Nordic Bankruptcy Convention contains rules regarding immediate recognition and enforcement of bankruptcy declarations within the Nordic member states. It should, however, be noted that the Insolvency Regulation takes precedence over the Nordic Bankruptcy Convention as regards Sweden and Finland (Denmark has an exception from the application of the Insolvency Regulation and Iceland and Norway are not members of the European Union).
iv Starting proceedings
A bankruptcy proceeding is started by the relevant local district court that has jurisdiction over the insolvent debtor. The district court will declare a bankruptcy if the debtor is deemed to be insolvent. The relevant insolvency test under Swedish law is cash-flow insolvency. A debtor is deemed to be insolvent if it cannot pay its debts when due and such inability is not merely temporary.
Both the insolvent debtor and any of its creditors may submit a petition to the local district court that the insolvent debtor shall be declared bankrupt. If the petition is made by the insolvent debtor, then it is assumed that the debtor is insolvent and the court usually issues a bankruptcy declaration immediately. On the other hand, if the bankruptcy petition is made by a creditor, then such creditor has to prove that the debtor is insolvent. However, the Bankruptcy Act contains certain insolvency presumptions that shift the burden of proof regarding the debtor’s insolvency from the creditor to the debtor. Creditors typically rely on these insolvency presumptions when submitting a bankruptcy filing in respect of a debtor. The court typically makes a decision in respect of a bankruptcy filing made by third-party creditors within two weeks from the court receiving such petition for bankruptcy.
Just as with a bankruptcy declaration, it is the relevant district court that decides whether a business reorganisation shall be started. It is almost always the debtor that applies for a business reorganisation. However, creditors may also submit petitions for reorganisation proceedings to commence although this requires consent from the debtor. In order for a business reorganisation to be approved, the debtor must be facing an immediate or pending inability to fulfil its payment obligations. Furthermore, the debtor has to be able to provide credible arguments as to why the reorganisation is likely to be successful.
v Control of insolvency proceedings
In a bankruptcy proceeding it is the court-appointed bankruptcy receiver who exercises the most control over the bankruptcy estate. The bankruptcy receiver is typically a lawyer who specialises in insolvency law and is a member of the Swedish Bar Association. The main principle is that the bankruptcy receiver is independently responsible for the administration of the bankruptcy estate. Actions taken by the bankruptcy receiver are generally not subject to approval by the creditors, the debtor or any third parties. The bankruptcy receiver is instead subject to supervision by public authorities. In addition to that, the bankruptcy receiver needs to give an account of his or her work before the district court that appointed him or her. Also, in certain material matters the bankruptcy receiver is legally required to confer with the foremost concerned creditors, although the receiver is not obliged to adhere to the opinions of such creditors.
The administrator also has decisive influence in a business reorganisation, although lacks formal power. However, the administrator needs the support of a majority of creditors in respect of a debt composition. The debtor and its directors and management are subject to an obligation to follow the instructions of the reorganisation administrator regarding how the business of the debtor shall be conducted. The directors and shareholders continue to exercise some control over the debtor, subject to the instructions from the reorganisation administrator and certain other restrictions set out in the Swedish Business Reorganisation Act. The administrator must give an account before the district court of the actions to be taken during the reorganisation proceeding.
vi Special regimes
Swedish insolvency law does not allow for any specific insolvency regimes for certain regulated entities. Any specific regimes typically follow from EU law that is either directly applicable in Sweden or indirectly applicable and implemented into Swedish law. The Insolvency Regulation is directly applicable in Sweden. Furthermore, Directive 2001/24/EC on the reorganisation and winding up of credit institutions and Directive 2001/17/EC on the reorganisation and winding up of insurance undertakings, have both been implemented into Swedish law. Finally, it should be noted that no special insolvency rules pertaining to corporate groups exist. A solvent group company will not become subject to an insolvency proceeding only because its direct or indirect parent company is insolvent. In the absence of any group-wide insolvency scheme, separate insolvency proceedings must therefore be started for each insolvent group company. It is, however, customary to coordinate the insolvencies so that the same bankruptcy receiver is appointed for all insolvent group companies.
vii Cross-border issues
Issues relating to cross-border insolvencies are subject to three parallel regimes under Swedish law. These three regimes apply in different situations and consist of the Insolvency Regulation and the corresponding EU directives regarding credit institutions and insurance undertakings, the Nordic Bankruptcy Convention and general legal principles applicable in respect of the jurisdictions not covered by the Insolvency Regulation or the Nordic Bankruptcy Convention (which have been briefly addressed in Section I.iii, supra, and will not be subject to any further review). However, the following are of importance as regards the general legal principles that apply in respect of cross-border insolvencies. Swedish law generally makes a distinction between primary insolvency proceedings and ancillary insolvency proceedings, where a primary proceeding concerns an insolvency where the debtor is domiciled in Sweden, and ancillary proceeding relate to situations where jurisdiction is exercised based on a weaker connection to Sweden such as, for example, the debtor having assets or business operations in Sweden. Swedish law is based on the notion that a main proceeding covers all of the debtor’s assets regardless of where in the world the assets are located. An ancillary proceeding on the other hand only covers a debtor’s assets in Sweden. Whether a Swedish main insolvency proceeding is recognised and enforced varies between different jurisdictions and significant challenges can occur if the debtor is not cooperating with the Swedish bankruptcy receiver in respect of foreign assets and business undertakings.
viii Selected additional topics
In addition to the predominantly formal rules that apply to Swedish insolvency proceedings, which have been described in Section I.iv, supra, two additional sets of rules are briefly outlined below, as they are important, especially in Swedish bankruptcy insolvency proceedings.
The Swedish Priority Rights Act
The Priority Rights Act classifies claims into the following three categories: claims with specific priority (primarily claims relating to specific assets); claims with general priority; and non-preferential claims. Claims with specific priority have the best preferential rights, but the preference only applies to certain assets. Claims without priority rank pari passu and will be covered proportionally. Any surplus after all creditors have been fully paid will be distributed to the shareholders.
As regards the bankruptcy costs, primarily the cost for the bankruptcy receiver, it should be noted that such costs rank higher than any prioritised claim. For property covered by specific priority, only bankruptcy costs pertaining to that particular property can rank higher than the specific priority. The bankruptcy costs rank before claims secured by business mortgages.
Finally, it should also be noted that Swedish law, in contrast to many other jurisdictions, does not give preference to tax claims; instead, such tax claims are treated as non-preferential claims and rank pari passu with all other unsecured creditors.
The Swedish Bankrupcty Act provides a regime whereby certain transactions can be made subject to clawback and be recovered to the bankruptcy estate. The cornerstone in the clawback regime is that improper transactions may be recovered if: a creditor has been treated preferentially; the assets of the debtor have been withheld or disposed of to the detriment of the debtor’s creditors in general; or the debtor’s total indebtedness has been increased. Such transactions can be recovered if the debtor was insolvent, or became insolvent as a result of the transaction, and the benefiting party was aware, or should have been aware, of the debtor’s insolvency and the circumstances making the transaction improper. An improper transaction is subject to a five-year hardening period, unless the transaction is to a closely related person, in which case no statutory limitation period applies.
In addition to the general clawback provision referred to above, there are also a number of other clawback provisions addressing a number of different transactions, such as gifts, granting of security and certain payment of debts or wages. The majority of these specific clawback provisions do not require the debtor to be insolvent or the benefiting party to have any knowledge of the debtor’s insolvency. However, the hardening period is typically shorter than in the case of improper transactions.
II INSOLVENCY METRICS
The Swedish real economy seems to be in a good state. Arguably, the number of bankruptcies has never been lower. Business reorganisations are historically even more infrequent. This can partly be explained by the fact that the interest rates are extremely low with a negative repo rate.2 Credit availability is still fairly good. Unemployment figures are decreasing, currently at approximately 7 per cent.3
The OMX share market index peaked during 2015 but has fallen somewhat during 2016.4 The share market is still highly valued. In particular, the valuation of real estate has increased to very high levels in comparison with past years.5
Although the economy is seemingly faring well, our view is that there is a reasonable number of companies with struggling profitability. Under more normal capital market circumstances, it would not be surprising if many of those companies defaulted. Since the insolvency rates are at all-time low, it is probable that the defaulting companies will increase rather than decrease, although it is uncertain when that development will commence.
During the first half of 2016 there were 2,862 bankruptcies in Sweden, which was 8 per cent lower than in the first half of 2015.8
There is no current clear trend of certain industries being specifically affected, although in our view there is a steady flow of construction companies going bankrupt despite the fact that market demand is very high. Some larger insolvency proceedings in the printing business occurred in the beginning of 2016 that were related to a court case ruling at the end of 2015 that had negative effects for many printing companies.
There are no available statistics for ancillary proceedings, but such proceedings seldom occur in Sweden.
III PLENARY INSOLVENCY PROCEEDINGS
i Business reorganisation of Stampen Media Group
Stampen is one of the largest media groups in Sweden with a turnover of approximately 3,619 million krona and around 3,500 employees. In May 2016, 16 companies within the privately held group commenced business reorganisations. The appointed administrator is Christian Andersch. In connection with this, a smaller number of companies within the group also applied for bankruptcy.
One underlying reason for the financial distress in Stampen is that for a long time the group have had an unhealthy debt-to-equity ratio. Much of the debts are likely to be related to a fairly aggressive M&A strategy that took place from 2010 to 2012.
Stampen’s financial situation became even worse after a court precedent in December 2015, which ruled that printing businesses (a big part of Stampen) were liable to repay VAT to its customers, which the printing businesses had been compensated for by the tax authorities some years earlier. For Stampen, these debts to its customers amount to 400 million krona.
The bank credits in the group amount to approximately 500 million krona, owed to a Swedish bank consortium consisting of Handelsbanken, Nordea and Swedbank. As main security, the bank consortium holds floating charges within the group together with pledge over shares.
It is not publicly known whether the group has acquired post-commencement financing or if the positive cash flow effects from the business reorganisation alone has been sufficient for the cash flow during the expected reorganisation period.
An official composition of 25 per cent of the nominal amount has been offered to the creditors without priority. As of June 2016, no known financing was secured for a composition payment.
One particular part of the group, OTW, has been sold, which has reduced the bank debts.
There are no known ancillary proceedings in the Stampen case.
ii Business reorganisation of PA Resources
PA Resources is a publicly traded Swedish parent company of a multinational oil and gas group with a turnover of approximately €70 million. In March 2015, the company commenced a business reorganisation. The appointed administrator was Lars Söderberg.
The total debts on the day for the application of business reorganisation amounted to approximately €265 million, of which approximately €185 million constituted unsecured debts to corporate bonds holders, €80 million constituted debts to owners or group companies and only €0.5 million constituted debts to suppliers.
The financial problems within the group were closely connected to the dramatic fall in oil prices in 2015.
The creditors without priority were offered full payment of up to 100,000 krona and 25 per cent composition of their nominal claims that exceeded 100,000 krona. As an alternative to the composition, the creditors were offered to choose an earnout payment plan that could potentially comprise full payment with certain interest, but over a longer time period and conditional upon the available cash flow in the company. The composition proposal was accepted by a sufficient majority of the creditors and the proceedings were closed in October 2015. Notably, the bond holder collective accepted the earnout payment plan.
There were no known ancillary proceedings in the PA Resources case.
iii Other notable business reorganisations
In addition to the reorganisations outlined in Section III.i and ii, supra, the clothing and interior decorating retail firm Indiska (with a turnover of approximately €85 million) is notable. As of August 2016, the proceedings are still ongoing.
The reorganisation proceedings of the clothing retail firm JC (with a turnover of approximately €70 million) are also still ongoing as of August 2016.
iv Notable bankruptcies
Some notable bankruptcies are as follows:
- a the Bitcoin group KnC (turnover approximately €70 million), official receiver: Nils Åberg;
- b the transport group Förenade Buss (turnover approximately €50 million), official receiver: Lennart Högberg;
- c the printing company Sörmlands Grafiska (turnover approximately €35 million), official receiver: Mikael Kubu; and
- d the shipping company Transbulk (turnover approximately €30 million), official receiver: Lennart Molander.
v Court precedents
In the Supreme Court case NJA 2015 s. 494 it was finally clarified that shares are never included in floating charge securities, regardless of whether the shares are privately held (e.g., in subsidiaries) or publicly traded.
The Supreme Administrative Court has determined a practically important matter in business reorganisations,9 namely regarding wage guarantees paid under a business reorganisation for work performed during the first month of the proceedings. The court decided that the claim held by the Swedish state, with regards to such distributed guarantees does not constitute an official composition and therefore has to be repaid in full when the reorganisation proceedings have ended.
In another case, HFD 2015 ref 58, the Supreme Administrative Court ruled on board members’ potential personal liability for unpaid taxes in connection with business reorganisations. Principally, the court made it clear that the board is not personally liable for taxes that have their origin before a business reorganisation was applied for but only became due during the reorganisation proceedings. This was hardly surprising since a company under a reorganisation is forbidden to pay debts originating before the reorganisation. More remarkably, the court set a very strict precedent for board members to act after an unsuccessful business reorganisation. In this case, the board applied for bankruptcy one week after the business reorganisation ended. This was not soon enough in the view of the court, which held that the board was liable for debts that had become due during the reorganisation.
IV ANCILLARY INSOLVENCY PROCEEDINGS
Ancillary insolvency proceedings are rare in Sweden. We are not aware of any such proceedings of importance during the previous year.
In the spring of 2015, a government committee report on ownership of moveables and a pledge register was presented.10 The committee’s proposed changes could lead to a paradigm shift with regards to transfer of ownership title to moveables. Until now the prevailing principle has been that an agreement is not a sufficient means of transferring the legal ownership with regard to third parties, and in addition the seller must not have access to the sold moveables. Under the proposed new regime, the agreement alone will be sufficient for a full transfer of the ownership title. It is uncertain whether the proposed changes will be legislated.
In October 2016, the entrepreneurship committee will present its report.11 Among other matters, this report is expected to contain a number of proposed changes with regards to insolvency proceedings, in particular business reorganisations. It is uncertain when such proposed changes may lead to legislation.
1 Carl Hugo Parment is a partner at White & Case and Nils Åberg is a partner at Advokatfirman Carler.
7 Ibid; the number of employees in bankrupt companies was approximately 15,000 in 2015.
9 Judgment of the Supreme Administrative Court dated 4 July 2015 in Case No. 5818-14.
10 SOU 2015:18.